What are Penny Stocks - Must Read Before You Start

What are Penny Stocks?

The penny stocks are traded mostly outside the stock exchanges such as NYSE or NASDAQ. There are various risks associated with these stocks and if you are looking for an investment in penny stocks, you are advised to go through the risks associated wit penny stocks.

Although there is some risk associated with every investment in financial market, penny stocks are good option for investment if you have some disposable amount, as here a small amount will be at risk. Broker or dealers trade these stocks and it is better to understand the financial terms associated with penny stocks. I would like to add that if you are looking some penny stocks for investment, you should learn more about penny stocks and you can find the relevant information about the subject on stock newsletter and message boards.

Stock Trading: Penny stocks are very speculative and have a market capitalization of around 500 million. These stocks are traded over the counter and the trading is governed by the SEC rules and guidelines on penny stocks. U.S Securities and Exchange Commission have laid down some rules for investment and trading in penny stocks and a beginner should keep these rules in mind before buying or trading in penny stocks.

 SEC Rules on Penny Stocks:  Broker-dealer registration compliance is must before buying or trading any penny stocks. A broker or dealer should get a written request and thereafter should approve the investor.

SEC further rules that a customer desirous to purchase a penny stock should be provided a document mentioning the risk involved in the penny stock. The broker or dealer should also inform the customer the current market rate of the penny stock and the commission that will be charged by the broker.

The provisions made in the appropriate sections also put a mandatory requirement of providing monthly statement to the investor showing rates of each penny stock held by the investor in his account.

Sometimes the other terms such as small caps and microcap are also used for these companies and The United States Securities and Exchange Commission has defined penny stock as a low-priced below $5.0 speculative securities of very small companies.

Many small companies have low assets and offer the stocks at very low price. These low price stocks known as penny stocks are traded over the counter generally in low volumes. These stocks are generally quoted on over the counter systems such as over the counter bulletin board (OTCBB) or pink sheets including foreign exchanges. The Securities and Exchange Commission strictly adheres that penny stock is low priced speculative stock and the term penny stock does not relate on market capitalization or it’s trading at the exchanges (NYSE, NASDAQ) or over the counter.

Penny stock’s definition by the Securities and Exchange commission is strictly on the basis of its value and it does not depend on other parameters such as the companies market capitalization or its listing. Investor should evaluate the risk factors associated with penny stocks before investing in them.